A Google Buying Opportunity?

Feb 27, 2008 13:17 · 373 words · 2 minute read

The NYTimes is reporting that Google is losing altitude as their “clicks go flat”. Investors nailed the stock 4.6 percent yesterday on word that ComScore thinks that Google’s click throughs on ads were flat between January 2007 and January 2008. Two analysts are quoted in the article as saying that Google’s problems are self-inflicted (or at least half self-inflicted). From the article:

Mr. Cleland said the most recent quarter, when Google’s revenue grew at 51 percent while profit rose only 17 percent, was the latest sign that the company was overspending. “If they cut their spending a little, so that they could start gaining earnings momentum again, their stock valuation would return,” he said.

Could it be that Google isn’t concerned about near term earnings momentum? Perhaps they’re investing in the long term growth of the business? For example, joining up with a group spending $300 million on a new undersea cable. It’s likely that they’re also spending to come up with new applications that will ultimately diversify their revenue. Check this out:

“I think at least half of it is self-inflicted,” said Jordan Rohan, an analyst with RBC Capital Markets. Mr. Rohan noted that Google has reduced the clickable area in text ads to avoid accidental clicks, which earn it revenue but are of little value to advertisers.

Does the quote really go with the “noted” part? This quote from the article makes it sound like improving ad click quality is bad for Google’s bottom line. Maybe for the near-term, but…

“Google has had this history of making major changes to the platform that have had terrific impact on monetization,” Ms. Wolk said. “Given the track record, we will give them the benefit of the doubt.”

Indeed. When Google was at its peak of nearly $750 per share, I definitely thought it was overvalued. At today’s price, GOOG has a P/E of about 35. Though that’s double the historical average, Google is still a fast grower and I think they still have more tricks up their sleeves. Where the rest of the market seems concerned about short term results, GOOG starts to look better as a long term stock. This is part of the reason that Google does not give earnings forecasts.